Indian hedge funds beat EM peers as markets shed 25% value amid Covid

Hedge funds are sophisticated investment vehicles for the rich, and seek to give higher returns often through the use of complex strategies, derivative instruments and leverage
Indian hedge funds have done better than their emerging market peers in a month which saw stock markets lose nearly a quarter of their value amid the spread of the Covid-19 pandemic.

Worries about Covid-19 caused stock markets to tank across the world and India’s S&P BSE Sensex to dip 23.05 per cent in March. Indian hedge funds significantly outperformed the broader market and also did better than their emerging market peers. While the Eurekahedge Emerging Markets Hedge Fund Index was down 9.59 per cent for the month, the Eurekahedge India Hedge Fund Index was down only 8.69 per cent.

Hedge funds are sophisticated investment vehicles for the rich, and seek to give higher returns often through the use of complex strategies, derivative instruments and leverage.  Eurekahedge tracks the performance of such funds across the world.

“Some of the steepest losses in March were recorded by fixed-income fund managers with substantial exposure to illiquid debt, and this strategy is not as common among Indian funds as they are among funds focusing on Latin America or the rest of Asia,” noted its hedge fund analyst, Nicky Indradi in an emailed response to a query from Business Standard.

Eastern European and Russian funds were down because of crashing oil prices. Emerging market countries whose economies are dependent on crude oil have been more affected by a recent crash.  Crude oil prices have more than halved to around $30 a barrel amid a fall in demand and price wars among oil-producing countries.

The fall in demand came as multiple countries went into lockdown in a bid to control the spread of Covid-19. Industrial activity and vehicular movement have all ground to a halt. Companies have seen stock prices crash as business took a hit.

Hedge funds limit downside during such times by also taking positions which go up in value when the market falls.

A continuing weak market may well contribute to similar outperformance in the future as well, according to portfolio management services (PMS) and alternative investment fund (AIF) industry tracker PMS Bazaar founder-director Daniel G M.

“If the market is going test new lows, then the probability of (similar) kind of returns is possible,” he said.

An analysis of Indian long-short category III alternative investment funds showed average returns of 7.5 per cent for the seven funds that his research tracks.

The Securities and Exchange Board of India (Sebi) had put curbs recently on the use of derivatives to bet on the markets going down.

“In the recent past, world over, the stock markets have been quite volatile owing to concerns relating to Covid-19 pandemic and the resultant fear of economic slowdown... Taking note of the continued abnormally high volatility in the market, SEBI discussed with the Stock Exchanges, Clearing Corporations and Depositories appropriate measures that may be taken in the existing circumstances... These measures will kick-in...(from)...the beginning of trading on March 23, 2020” it said.

This is not expected to affect AIFs too much, according to Daniel G M.

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